Making an impact with social funds

Contributed by: Meera Siva

There is a lot of talk on impact funds, but what exactly are impact funds?  The definition was the first question that Ravi Saraogi addressed through a video from World Economic Forum that gave a perspective on social funds and defined it at the Panel Discussion organised by IAIP February 15th in Chennai. The panelist included (1) Krishanmurthy Vijayan, founder Charioteer Fund, a SEBI registered social fund, (2) Dr Thillai Rajan Associate Professor at IIT-M Dept of Management Studies, (3) Krishna Srinivasan, founder of Everest Edusys, a start-up focused on improving science education in government schools and (4) Suchindran VG, CEO of IFMR Investment Advisers. Ravi Saraogi moderated the session.

Krishnamurthy Vijayan referred to a document from JP Morgan and Rockefeller Foundation that is a good primer on the emerging asset class of impact investments. He said that the social ventures his fund plans to invest in must be inherently profitable, be cash positive and help grow employment by 25 per cent. The employees are given their share of benefits such as employee stake through mutual benefit trusts, health cover, and medical insurance. To ensure sustainability, the excess returns after the fund takes its nominal share is retained in an escrow account for employee welfare to sustain operations.

Dr Thillai Rajan presented data on the size of the social funds industry. He said that only 2 per cent of the private equity industry of $9 billion in India is invested in social ventures. Data also shows that investments are in smaller ticket sizes compared to conventional venture funds and it stays invested longer. For example, domestic investors took 65 months on average to exit social funds, compared to a 38 month life of other venture investments. He also pointed out that $1 invested by social funds later led to $2.2 of funds coming in from mainstream sources. Also in the microfinance space, companies that received funds have grown well on all metrics compared to companies without social funding.

Krishna Srinivasan spoke about his odyssey. He said that there are too many challenges and anyone who wants to be a social entrepreneur has to take an ‘inch wide, mile deep’ approach. In his case, he is working with IITs, IISc and US universities along with a lot of government data to make teaching science concepts to children in 1 million government schools. Education is vital to pull people out of poverty, just as health care is important as costs here push people to poverty. Innovation needs risk dollars but NGOs cannot do this as they are not a tight program where things have to work and there is no room for failure.

Suchindran VG spoke of his experiences in the micro-finance space. The firm is looking to launch social funds to provide debt to various asset classes like microfinance, SMEs and affordable housing. He talked about enriching all stakeholders in the venture as that ensures sustainability. Equitas microfinance for instance would spend 5 per cent on health initiatives and education in the community where they operate by way of getting teachers engaged with the family. He noted that moneylenders will continue to exist because of their ability to give loans at a very short notice and for emergency purposes like health. But small companies need not have to go to usurious lenders for their working capital needs. A large company gets a better credit rating and a favourable lending rate while many companies operating in the Bottom of the Pyramid sectors suffer from lack of rating and avenues to raise capital at reasonable cost.

– M S

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